For 4QFY2011, HCC’s numbers came in line with our expectations. Going ahead, we expect HCC’s interest cost to increase on the back of higher debt requirements to fund its working capital and rising interest rates regime. We believe HCC’s stock performance depends on the outcome of the ongoing Lavasa legal wrangle with the Ministry of Environment and Forests (MOEF). Owing to these concerns, we maintain our Neutral view on the stock.
Results in line with estimates: For 4QFY2011, HCC reported top-line growth of 10.8% yoy to `1,202cr (`1,085cr), almost as per our estimate of `1,217cr. EBITDAM surprised positively with an improvement of 250bp yoy and stood at 13.8% (11.3%), against our estimate of a 90bp improvement. PAT declined by 47.4% yoy to `22.6cr (`43.0cr), in line with our estimate of a 44.7% dip. Poor bottom-line performance was due to higher depreciation cost (118.4% increase yoy) and interest cost (103.8% yoy jump, attributed by increased debt levels and hardening of interest rates) and higher tax rate (50.2%).
Outlook and valuation: We expect strain on cash flows for HCC and Lavasa on several accounts for the short to medium term – a) Lavasa has debt of `1,950cr, and as construction activity has come to a standstill, the company’s cash flows have been stalled (loss of ~`2cr per day as per management), without clarity about restoration of the same in the near future; b) the proposed IPO to fund the Lavasa project has been delayed indefinitely, which has affected investor confidence; c) also, if the MoEF penalty is substantial, HCC’s balance sheet and cash position would be further stretched. We are also concerned about HCC’s standalone business due to poor order booking for FY2011 along with weak outlook for new orders because of slowdown in award activity (read power segment), deteriorating working capital situation and increased debt levels. Hence, we maintain our Neutral view on the stock.
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